Westpac-St George merger won't topple four-pillars

By Malcolm Maiden

15 May 2008 — 12:00am

THE Westpac takeover offer for St George resurrects a question about the four-pillars banking policy that is raised every time one of the majors moves on a competitor. Is four pillars pro-competition, or the regulatory equivalent of superglue?

Four pillars was created by Paul Keating in 1990, as a six-pillar ban on intermarriage covering Commonwealth Bank, Westpac, NAB, ANZ and two insurers, AMP and National Mutual. It was an essentially intuitive policy overlay to a single decision, to block a merger of ANZ and Nat Mut.

In 1997, Stan Wallis' financial system inquiry recommended that the pillars be dismantled, to leave the banks subject to the same merger competition tests as other businesses, but by then, the pillars were as good as classified by the National Trust. The view on the street is that the banks are bastards - and the belief on the street was (and is) that Keating's pillars made it harder for them to be bigger bastards.

Costello's response to the Wallis report's recommendation was accordingly minimalist. The two insurers lost their pillar status (National Mutual had by that time already been knocked off anyway, by France's AXA), but the ban on mergers of the remaining four banks was retained, with Costello adding a free-market rider, that none of them were considered immune from foreign takeover.

A flurry of speculation about a foreign takeover of one of the majors followed, and Hong Kong and Shanghai Bank was the popular tip. But it came to nothing. BankWest had been half-owned by Bank of Scotland since 1995, and after merging with Halifax to become HBOS in 2001, it acquired the balance of the Perth-based outfit. But the attractions of the Big Four Australian banks were insufficient to generate an offer from one of the overseas majors, and continue to be.

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Through it all, however, the justification for overlaying the merger overview process of the Trade Practices Act with a specific merger policy for the big banks has been the same. It is that while the Trade Practices Act and its enforcement agency, the Australian Competition and Consumer Commission, can ensure that mergers generally do not result in a substantial lessening of competition, four pillars and its enforcer, the Treasurer, will ensure that competition in the banking sector is actually enhanced.

This is a crucial difference: four pillars is not intended to maintain the status quo, but to foster greater competition, and the evidence is that it does not meet this objective.

Four pillars does arguably create competitive space for competitors to emerge. But because it is definitionally limited to the Big Four banks, it also does nothing to prevent the Big Four from eliminating competition as it arises. Four pillars was irrelevant, for example, in 2000, when CBA eliminated the Colonial group, which had emerged as a major bank-insurance combine in the '90s after the boss of the Colonial Mutual insurance group, Peter Smedley, took over State Bank of NSW in 1994. (Nostalgia buffs might care to know that Smedley paid a touch over $500 million or five times earnings for the state bank, which had 293 branches, assets of about $19 billion and earnings of about $100 million. Westpac's offer values St George and its 400 branches and annual profit of about $1.3 billion at $19 billion, or 14.6 times earnings).

Nor were the pillars a factor in Westpac's previous two expansions - the 1997 takeover of Bank of Melbourne, and the 1995 takeover of Challenge Bank.

And as things stand, the pillars will also not be a factor this time. It's four pillars, not five, and even at the 28.5% premium implied by Westpac's share exchange offer, at $19 billion St George is still much smaller than the Big Four, which begin with ANZ's market capitalisation of $43.7 billion, followed by Westpac at $46.9 billion, NAB at $55.2 billion and CBA at $59.6 billion.

That is the status quo unless Treasurer Wayne Swan decides that four pillars is failing if it only creates competition that can then be removed by takeover. He could do so, for example, by declaring that other banks that grow as St George has under the shelter of four pillars can also reach a mass that makes them pillar candidates.

That would, however, be a radical change - one a government keen to establish its pro-market, pro-business credentials is unlikely to make. So far, Swan has only tacitly acknowledged the political sensitivity of four pillars by stating that the Government has no plans to dismantle it. A move to strengthen it would be another thing entirely.

Absent that, four pillars will be off the radar, and the competition impact of a Westpac-St George union will be tackled by the ACCC.

Some of the things Graeme Samuel's outfit is being asked to consider this week won't be on the agenda. The unions are fearful that the marriage will result in heavy job cuts, for example, but that is not an issue in ACCC merger assessments. Westpac's promise to maintain St George's street face is also relevant only insofar as it impacts on the market for banking services, and the ACCC will test that at deeper levels - national lending and home lending certainly, regional lending and home lending in NSW and South Australia almost certainly, and lending into specific markets such as small business possibly.

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The same sort of tests would probably also prevent the Big Four from merging down into a big two, with lending market shares of between 30% and 40% in major sectors. But for the foreseeable future the flawed four-pillars policy looks like having primacy in that area.